Amortisation

What is Amortisation?

Amortisation refers to the incremental reduction of a loan over time through repayments. In simple terms: each time you make a payment on a loan, the amount you owe gets smaller.

In the context of mortgages, Amortisation takes place when payments are sufficient to repay both the original capital (the amount borrowed) off along with any interest added. In the UK these are referred to as Repayment or Capital and Interest Mortgages. By contrast, if you have an Interest-only mortgage, the initial amount borrowed remains outstanding at the end of the term of the mortgage.


Q: What is the difference between Amortisation and Depreciation?

A: Depreciation relates to an item that has reduced in value since purchase e.g. a new car. Comparatively, Amortisation refers to the declining sum of the loan, not the item's respective market value.

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